July 31, 2012

A Touch of Grey for Full Tilt Players?

I see you've got your list out, say your piece and get out.
Yes I get the gist of it, but it's all right.
Sorry that you feel that way, the only thing there is to say is
Every silver lining's got a touch of grey.

~The Grateful Dead, "Touch of Grey"

The big poker news of the day was the announcement that the DOJ and PokerStars had reached a deal to settle the federal forfeiture proceeding against PokerStars in exchange for PokerStars paying off Full Tilt Poker's players in full for the money stolen/mismanaged from them by directors Ray Bitar, Chris "Jesus" Ferguson, Howard Lederer, and Rafe Furst. Obviously this is welcome news to the tens of thousands of Full Tilt players whose funds have been frozen (or been gambled or spent by Full Tilt shareholders) for over fifteen months. But for some of those players, the check they get in the mail might be a little lighter than they anticipated.

A key provision of the settlement agreement provides that the DOJ will be paid settlement funds from PokerStars to reimburse U.S. players, while PokerStars will reimburse foreign players directly. The settlement agreement also provides that PokerStars will provide the DOJ with player account records to facilitate the reimbursement of U.S. players. Although the DOJ has not yet announced reimbursement procedures for U.S. players to follow, the involvement of the DOJ raises the interesting question of whether some players will receive their entire account balance.

What could possibly prevent a full refund? Well, it seems almost certain that players will need to file some kind of paperwork to the government to submit their claims, and that paperwork will almost certainly include basic information such as names, addresses, and social security numbers. Most likely, the government will also issue a Form 1099-MISC or a Form W2-G with any player reimbursements. Consequently, there are a number of legal issues that might arise that would affect the reimbursement of certain players, including:

Delinquent child support obligations: The federal government is actively involved in enforcing child support withholding.

Divorce & bankruptcy court proceedings: Players who have filed asset inventories in divorce or bankruptcy proceedings might find that attorneys for their former spouse or creditors have developed an interest in determining if a poker account refund is in the works.

Civil judgment and criminal fine garnishments: Players who have unpaid civil judgments and criminal fines may face garnishments of their account funds.

As a practical matter, the tax and child support debts are more likely to affect players, as the government is more active in seeking out funds to satisfy those kinds of debts, and those types of debts are fairly easy for the government to locate and garnish with the straightforward exchange of data (e.g., names, addresses, social security numbers). Divorce and bankruptcy proceedings, as well as civil judgments and minor criminal fines (e.g., traffic or parking tickets) are more likely to fly under the radar unless and until an interested party catches the whiff of money in the air; remarkably, this happens a fair percentage of the time.

However, even players who don't have any current outstanding debts are not immune from potential financial issues related to their refunds. Players with significant refunds due will likely find themselves facing tax withholding, as well as potential audits of prior tax returns (remember, the DOJ will have full access to all past Full Tilt accounting records for each player account). Every player receiving a refund will also need to pay taxes on their refund proceeds. If players have kept good records, they may be able to deduct poker losses to reduce or eliminate their taxes owed. But players who haven't kept good records may well find themselves paying taxes on the full amount of their refund.

I'm happy for all the Full Tilt players who now have a good chance of recovering their funds which once seemed lost to yet another online poker scandal. If some of those players have a portion of their funds garnished to satisfy child support, tax, or other legal debts, well, every silver lining has a touch of grey.

ADDENDUM (31 July 2012): After I hit publish, I found out via Twitter that tax attorney Brad Polizzano (@taxdood) had also written about the tax implications of Full Tilt refunds. Check out his post!

ADDENDUM (1 August 2012): To follow up on a series of questions and comments on Twitter, I want to clarify that it's not a guarantee that the DOJ would issue a Form 1099/W2-G with any refund. The federal regulations related to remissions in forfeiture cases are silent as to tax withholding, but do provide that the DOJ can impose procedures and conditions for remissions. So at the very least, there will be some kind of paper trail to tie remissions to players, and that paper trail at least creates potential tax implications for players.

Also, normal tax rules will apply to any remissions. So tax would only be owed on the profit/gain, and not on the deposit portion of the player account. Assuming players paid taxes in prior years and have good records, they may well owe nothing further (unless they declared a casualty loss for theft/loss of their account funds). Players who did not pay taxes, underpaid taxes, and/or lack appropriate records to document wins/losses may well find themselves with tax issues. Depending on the records available to the DOJ and PokerStars, the DOJ might be able to document deposits and wins/profits for player reporting purposes, but I'm not certain the DOJ is going to want to go to that kind of trouble. As Brad Polizanno wrote in his blog (see first Addendum above), it would be a surprise if the DOJ and PokerStars have not already thought out most of these sort of logisitics.

8 comments:

My understanding, perhaps deeply flawed, is that it is NOT routine for the DoJ to share potentially tax-related information with the IRS in cases where the individual has no criminal involvement (i.e. no current judgment/garnishing/etc.).

@ Cardgrrl: You are correct that the DOJ generally does not alert the IRS to tax issues uncovered during non-tax investigations. There are a couple of different issues in play, however, that I'm referring to in my post.

The first is the simple sharing of information related to funds held (e.g., tax liens, child support garnishments, etc.). That information is routinely shared.

As for audits, although the DOJ likely won't comb through the Full Tilt records directly to find players who underreported poker income, players with larger balances nonetheless are likely to independently trigger IRS audits based on the absolute size of 1099/W2-G income reported, or the relative size of the poker income reported relative to past reporting and/or current income. For most players, the account balance will be small enough that there is little risk of an audit. But for players well into the upper five figure range or above, they would be wise to make certain their supporting records are in good shape.

@ Memphis MOJO: That question requires a longer answer, but the short answer is that Stars gets the forfeiture lawsuit settled, and gets to look like the white knight. There is no adjudication that Stars was operating illegally, so they have a shot at getting past regulators if/when they apply for US licenses (though I still think some of the associated guilty please implicate Stars to a large degree, and will pose a big hurdle to licensing). And they get the FT Rush Poker and other software, and possibly some intellectual property rights, for whatever value that has.

@Carl: The foreign bank account issue is interesting. I hadn't thought of it, but with all of the "Tilt transfer" economy that existed, it certainly might be an option for the IRS.

With Stars getting Tilt (while playing savior to the Tilt players) do they also get much in the way of additional European or other non-US customers? Or did Tilt have a heavily US centered customer base? I don't know, just spitballing here. They'll have the software interface they were using, and of course will know who they are since they're taking the responsibility of paying the non-US customers directly.